Frozen tax thresholds and the looming cut to the Cash ISA allowance mean it’s getting harder to keep your savings interest out of the clutches of the taxman. So it’s no wonder more people are looking for tax-efficient alternatives. The recent movement in gilt prices has been a useful reminder that gilts could be the missing piece of the puzzle that savers are looking for.
What are gilts?
Gilts aren’t hugely familiar to a lot of people, but that shouldn’t put you off. They're essentially loans to the UK government. You lend them money for a specific number of years, in return for a regular payment known as a coupon. When they mature, the government repays the full face value (known as par value and usually £100) to whoever holds the bond.
How people use gilts
Most people know them as an investment class, which they usually access through a bond fund. They hope to take advantage of the income from the coupon and any changes in price. Gilt prices will rise and fall with demand, so investors aim to buy low and sell high. This comes with the investment risk that the price of a bond can fall before you sell it, so you could lose money. It’s very different to the risk profile of cash savings.
However, others use them as an alternative to savings, buying individual bonds through investment platforms. You can buy a bond that’s within a few years of maturity, hold it until the end date, and you’ll get the par value at that point. You need to be comfortable with the fact that if the UK government defaults on its debts, you may not get the full repayment, but that’s highly unlikely.
The key is that gilts with low coupons, issued during the pandemic and set to mature soon, tend to be priced below their par value. At the time of writing, for example, there’s one due to mature in January 2028 with a coupon of just 0.125%, priced at £93.20. On its maturity date you’ll get £100 for every £93.20 you put in. The monthly payment is small, so the lion’s share of the gain is the difference between what you pay for it and what you get back when it matures.
The tax advantage
The return is decent, but tax is the key. There are two taxes to consider when it comes to gilts. The coupon is taxed as income, so faces the same issue as savings. However, with low coupon gilts, this is only a tiny fraction of the return. The rest is the rise in the value of the gilt between when you buy and when you are repaid, and this is free of capital gains tax. It means most of your gain is tax-free.
Frozen income tax thresholds – and the lowering of the additional rate threshold – have made tax-efficient saving even more vital. Crossing an income tax threshold means your personal savings allowance halves or disappears altogether, and the excess is charged at your new higher marginal rate. This, combined with cuts to the Cash ISA allowance for those under 65 from April 2027, means more people paying more tax on their savings.
Doing the maths
Take that gilt maturing in January 2028, priced at the time of writing at £93.20 and delivering a coupon of 0.125%. To match the return after tax, a basic rate taxpayer would need cash savings paying 5.27%, higher rate taxpayers would need 7.03% and additional rate taxpayers 7.67%. Tax treatment depends on individual circumstances and rules may change. At the same time, the best two-year savings rate on the market was 4.63%.*
*Top paying two-year fixed account is Close Brothers at 4.63% as of 13 April 2026 (source: Moneysavingexpert).
Sarah Coles: Head of Personal Finance
Sarah Coles is AJ Bell’s Head of Personal Finance. She’s passionate about helping people get to grips with their money, so they have more freedom to do the things that really matter to them in...
